ANZ Bank Riding China’s Coat Tails

ANZ Banking Group (ANZ) is the nation’s third-largest bank by market capitalisation, and is among the top 50 banks in the world.

The group provides a variety of banking and financial products and services to around 8 million customers, and employs 48,000 people worldwide. ANZ operates in Australia, New Zealand, Asia, the Pacific, the Middle East, Europe and America.

In recent years the group’s strategy has shifted to become a super-regional bank. To this end, the bank is aiming for between 25-30% of its earnings to come from its Asia, Pacific, Europe and America Division (APEA) by 2017, with the major focus being the high growth Asian region.

FY12 results

ANZ’s FY12 results were good without being great. The banking major recorded FY12 statutory profit of $5.7 billion, up 6% from the FY11 result.

An increased capital base saw EPS only rise by 2% year on year, to 213.4 cents a share. Dividend growth over the financial year managed to outpace inflation, with a 4% increase to 145 cents a share.

We were most impressed with direction of the group’s super-regional strategy.

As the above shows the group managed to grow the income from APEA by 5% over FY12 to 21%. Notably the group also managed to slow down operating expense growth in the region from 11% to 4%.

The group’s APEA strategy continues to be a key driver for ANZ’s overall business results and we think this will continue as the group strives for a contribution of 25% – 30% of overall profit by 2017.

China expanding again!

For much of the early part of 2012 the discussion surrounding China was whether the slowdown in growth would be a hard landing or a soft landing. The fears of a hard landing abated by the end of the second half, helped by China’s central bank adopting an easing bias towards monetary policy.

The central bank actually began its stimulus measures in December 2011 when it implemented the first of a series of reserve requirement ratio (RRR) cuts. After cutting the RRR by 1.5% the PBOC then cut the country’s official interest rate by a little over 0.5% in the months of June and July.

These stimulus measures have began to show signs of flowing through to China’s manufacturing sector, which was the cornerstones of the country’s explosive growth of the last 10 years.

The month of November saw the HSBC Flash Manufacturing Index return a reading of over 50 for the first time in 12-months, indicating the sector had returned to expansion. Every month since that return to expansion was followed by an increase in the index, with yesterday’s reading of 51.9 marking a 24-month high.

Outlook

ANZ’s FY12 results provide it with a good base to tackle FY13. The year was not an easy one for the global banks in general, with the eurozone crisis leading to higher funding costs, which increased pressure on bank interest margins.

ANZ’s net interest margin contracted 11 basis points over the year. That being said, it was the group’s exposure to Asia that allowed it to grow earnings.

We believe that ANZ’s leverage to the growing Asian region will continue to benefit the company and this is expected to result in further share price appreciation.

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